What new borrowers need to know about mortgages
Aside from finding a mortgage lender that will lend you the amount you need and understanding your borrowing capacity.
You will also need to consider the different loan products, interest rates, loan term and any other special features on offer (such as whether you can redraw funds without cost, any conditions around making extra payments, and if there is cost to change anything with your loan).
Let’s start on your mortgage journey by getting a better understanding about mortgages.
How much deposit do I need?
Your deposit is your contribution on your new home and, generally speaking, the bigger the better. If your contribution is less than 20 per cent of the real estate purchase price you will need lenders mortgage insurance (LMI).
It may be possible to borrow up to 98 percent of your new homes value but this can be risky as you start with no equity and mostly probably have to pay a hefty LMI premium if you don’t qualify for one of the 10,000 federal governments first home buyers deposit guarantee grants.
If you don’t have a deposit and miss out on the federal grant, there are still other options. One is to enlist a guarantor, such as your parents, these are called family guarantees and would involve their financial support (for example, through a mortgage on a property).
Do I need pre-approval for a mortgage?
Lenders offer various types of pre-approval home loans. Applying for pre-approval with a lender will help determine how much you can borrow. While approaches may vary, generally there are two types:
· Basic pre-approval home loan: offered online by some institutions, this will give you an idea whether a lender is likely to provide you with a mortgage. It’s a handy guide but it’s not a formal agreement, so don’t rely on it as a guarantee of funds.
· Conditional pre-approval home loan: also called indicative pre-approval or approval in principle, this means the lender has assessed your circumstances and is likely to approve your loan but your application hasn’t been formally assessed so it’s not a guarantee that they will give you a formal approval once you have located a property.
Though it may seem easier to apply for pre-approval with your existing bank, it will be worth your while researching to see what mortgage options are available from other lenders before making an application.
If you do decide to go down the path of applying for a pre-approved home loan, you should know that if you go to different lenders directly and apply for pre-approvals, there is a chance that your credit score will be negatively impacted.
One of the best ways to avoid multiple credit enquiry hits on your report is to use a mortgage platform like loansHub. When applying with loansHub, you will receive personalised offers from multiply banks without any negative impact on your credit score.
Mortgages and interest rates
There are two primary types of interest rates on mortgages:
Fixed and variable. Both have their respective pros & cons and it’s important to get the right advice as to what either means for you financially. Here’s a base level description for both;
· Fixed rate mortgage: best for the borrower who wants to stick to a budget and plan their finances. You’ll miss out on the benefit of interest rate drops but you’re also protected against increases.
· Variable rate mortgage: a flexible option if you don’t mind some risk, as you may get hit with a rate rise and end up paying more interest. On the other hand, you will benefit from interest rate falls, which will help you pay off your loan earlier.
It may be possible to split your home loan so that part of it is fixed and the rest is on a variable rate. Australians have traditionally stuck to Variable home loan rather than fixing their home loan rates.
The choice of course is yours and you should base it on the level of risk you are willing to take.
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This article does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.